EXHIBIT 13.1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of Florida Progress Corporation
and Florida Power Corporation:
We have audited the accompanying consolidated balance sheets of Florida Progress
Corporation and subsidiaries, and of Florida Power Corporation, as of December
31, 1999 and 1998, and the related consolidated statements of income, cash
flows, and common equity and comprehensive income for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of the
financial statements, we also have audited the financial statement schedules.
These financial statements and financial statement schedules are the
responsibility of the respective managements of Florida Progress Corporation and
Florida Power Corporation. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Florida Progress Corporation
and subsidiaries, and Florida Power Corporation, as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedules when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
- ------------
KPMG LLP
St. Petersburg, Florida
January 20, 2000, except as to paragraph 1 of Note 2, which is as of March 3,
2000
FLORIDA PROGRESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Income
For the years ended December 31, 1999, 1998 and 1997
(Dollars in millions, except per share amounts)
1999 1998 1997
----------- ----------- ----------
REVENUES:
Electric utility $ 2,632.6 $ 2,648.2 $ 2,448.4
Diversified 1,212.5 972.1 868.0
----------- ---------- ---------
3,845.1 3,620.3 3,316.4
EXPENSES: ----------- ---------- ---------
Electric utility:
Fuel 596.0 595.7 458.1
Purchased power 414.1 433.8 490.6
Energy conservation costs 81.2 79.6 67.0
Operation and maintenance 466.4 471.6 422.3
Extended nuclear outage - O&M and replacement power costs -- 5.1 173.3
Depreciation and amortization 347.5 347.1 325.9
Taxes other than income taxes 203.1 203.6 193.6
----------- ---------- ---------
2,108.3 2,136.5 2,130.8
----------- ---------- ---------
Diversified:
Cost of sales 1,072.3 827.2 753.9
Loss related to life insurance subsidiary 11.8 -- 97.6
Other 77.8 56.3 60.4
----------- ---------- ---------
1,161.9 883.5 911.9
----------- ---------- ---------
INCOME FROM OPERATIONS 574.9 600.3 273.7
----------- ---------- ---------
INTEREST EXPENSE AND OTHER:
Interest expense 173.6 187.1 158.7
Allowance for funds used during construction (7.2) (16.9) (9.7)
Distributions on company obligated mandatorily
redeemable preferred securities 15.2 -- --
Other expense / (income), net (13.3) (.2) 4.0
----------- ---------- ---------
168.3 170.0 153.0
----------- ---------- ---------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 406.6 430.3 120.7
Income taxes 91.7 148.6 66.4
----------- ---------- ---------
NET INCOME $ 314.9 $ 281.7 $ 54.3
=========== ========== ==========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 98.1 97.1 97.1
=========== ========== ==========
EARNINGS PER AVERAGE COMMON SHARE
(Basic and Diluted): $ 3.21 $ 2.90 $ .56
=========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
FLORIDA PROGRESS CORPORATION
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in millions)
1999 1998
----------- ------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Electric utility plant in service and held for future use $ 6,784.8 $ 6,307.8
Less- Accumulated depreciation 2,923.8 2,716.0
Accumulated decommissioning for nuclear plant 285.0 254.8
Accumulated dismantlement for fossil plants 132.5 130.7
----------- ------------
3,443.5 3,206.3
Construction work in progress 139.7 378.3
Nuclear fuel, net of amortization of $401.0
in 1999 and $377.2 in 1998 68.7 45.9
----------- ------------
Net electric utility plant 3,651.9 3,630.5
Other property, at cost, net of depreciation of $275.0
in 1999 and $234.6 in 1998 703.4 560.1
----------- ------------
4,355.3 4,190.6
----------- ------------
CURRENT ASSETS:
Cash and equivalents 9.6 2.5
Accounts receivable, less allowance for doubtful accounts of
$5.8 in 1999 and $5.0 in 1998 420.6 413.4
Inventories, primarily at average cost:
Fuel 109.8 69.8
Utility materials and supplies 90.8 83.3
Diversified operations 175.9 137.0
Deferred income taxes 41.3 55.9
Prepayments and other 113.7 92.2
----------- ------------
961.7 854.1
----------- ------------
DEFERRED CHARGES AND OTHER ASSETS:
Costs deferred pursuant to regulation:
Deferred purchased power contract termination costs 297.8 321.0
Other 94.0 113.6
Investments in nuclear plant decommissioning fund 377.2 332.1
Goodwill 171.1 139.8
Joint ventures and partnerships 66.2 71.5
Other 204.9 138.1
----------- ------------
1,211.2 1,116.1
----------- ------------
$ 6,528.2 $ 6,160.8
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
FLORIDA PROGRESS CORPORATION
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in millions)
1999 1998
------------ ------------
CAPITAL AND LIABILITIES
COMMON STOCK EQUITY:
Common stock without par value, 250,000,000 shares authorized,
98,454,089 outstanding in 1999 and 97,336,826 in 1998 $ 1,267.3 $ 1,221.1
Retained earnings 741.8 640.9
Other comprehensive income (.4) --
------------ ------------
2,008.7 1,862.0
PREFERRED SECURITIES:
Cumulative preferred stock of Florida Power without sinking funds 33.5 33.5
Company-obligated mandatorily redeemable quarterly income preferred
securities (QUIPS) of a subsidiary trust holding solely Florida Progress
guaranteed junior subordinated deferrable interest notes 300.0 --
LONG-TERM DEBT 2,154.1 2,250.4
------------ ------------
TOTAL CAPITAL 4,496.3 4,145.9
------------ ------------
CURRENT LIABILITIES:
Accounts payable 309.0 279.1
Customers' deposits 105.6 104.1
Taxes payable 10.3 10.1
Accrued interest 77.4 70.4
Overrecovered utility fuel costs 31.6 22.2
Other 112.4 104.6
------------ ------------
646.3 590.5
Notes payable 153.1 236.2
Current portion of long-term debt 163.2 145.9
------------ ------------
962.6 972.6
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 565.3 595.4
Unamortized investment tax credits 70.0 77.8
Other postretirement benefit costs 123.1 116.1
Other 310.9 253.0
------------ ------------
1,069.3 1,042.3
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
$ 6,528.2 $ 6,160.8
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(Dollars in millions)
1999 1998 1997
-------- ---------- ----------
OPERATING ACTIVITIES:
Net income $ 314.9 $ 281.7 $ 54.3
Adjustments for noncash items:
Depreciation and amortization 446.2 424.6 364.2
Extended nuclear outage - replacement power costs -- -- 73.3
Provision for loss on investment in life insurance subsidiary 11.8 -- 86.9
Deferred income taxes and investment tax credits, net (38.4) 44.8 (30.7)
Accrued postretirement benefit costs 7.0 8.7 8.6
Changes in working capital, net of effects from sale or acquisition of
businesses:
Accounts receivable (16.9) (2.5) (108.3)
Inventories (82.8) 51.1 2.2
Overrecovered/underrecovered utility fuel costs 9.4 51.7 (33.1)
Accounts payable 18.3 17.8 58.3
Taxes payable 16.0 (8.2) (47.1)
Prepayments and other (22.4) 3.1 1.2
Other operating activities 24.0 5.1 12.8
-------- ---------- ----------
687.1 877.9 442.6
-------- ---------- ----------
INVESTING ACTIVITIES:
Property additions (including allowance for
borrowed funds used during construction) (574.0) (543.3) (513.6)
Acquisition of businesses (55.9) (206.6) (32.7)
Cogeneration facility and contract termination costs -- -- (445.0)
Proceeds from sale of properties and businesses 29.1 40.6 24.3
Proceeds from sale and leaseback 47.0 153.0 --
Other investing activities (58.5) (129.3) (63.7)
-------- ---------- ----------
(612.3) (685.6) (1,030.7)
-------- ---------- ----------
FINANCING ACTIVITIES:
Issuance of long-term debt 50.0 259.1 482.8
Repayment of long-term debt (144.4) (275.1) (34.9)
Increase (decrease) in commercial paper with long-term support (16.5) -- 130.6
Issuance of company obligated mandatorily redeemable preferred 300.0 -- --
securities
Sale of common stock 43.2 12.7 --
Dividends paid on common stock (214.0) (207.8) (203.8)
Increase (decrease) in short-term debt (83.1) 21.4 210.8
Other financing activities (2.9) (3.2) .5
-------- ---------- ----------
(67.7) (192.9) 586.0
-------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 7.1 (.6) (2.1)
Beginning cash and equivalents 2.5 3.1 5.2
-------- ---------- ----------
ENDING CASH AND EQUIVALENTS $ 9.6 $ 2.5 $ 3.1
======== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 159.7 $ 159.7 $ 142.7
Income taxes (net of refunds) $ 152.0 $ 110.4 $ 141.7
The accompanying notes are an integral part of these consolidated financial
statements.
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Common Equity and Comprehensive Income
For the years ended December 31, 1999, 1998 and 1997
(Dollars in millions, except per share amounts)
Accumulated
Other
Common Retained Comprehensive
Total Stock Earnings Income
------------ ------------ ----------- ------------
Balance, December 31, 1996 $ 1,924.2 $ 1,208.3 $ 716.5 $ (.6)
Net income 54.3 54.3
Reversal of unrealized loss on marketable
securities due to deconsolidation .6 .6
------------ ------------ ----------- ------------
Comprehensive income 54.9 -- 54.3 .6
Common stock issued - 55,772 shares .7 .7
Cash dividends on common stock ($2.10 per share) (203.8) (203.8)
------------ ------------ ----------- ------------
Balance, December 31, 1997 1,776.0 1,209.0 567.0 --
Net income 281.7 281.7
Common stock issued - 273,872 shares 12.1 12.1
Cash dividends on common stock ($2.14 per share) (207.8) (207.8)
------------ ------------ ----------- ------------
Balance, December 31, 1998 1,862.0 1,221.1 640.9 --
Net income 314.9 314.9
Foreign currency translation adjustment (.4) (.4)
------------ ------------ ----------- ------------
Comprehensive income 314.5 -- 314.9 (.4)
Common stock issued - 1,117,263 shares 46.2 46.2
Cash dividends on common stock ($2.18 per share) (214.0) (214.0)
------------ ------------ ----------- ------------
Balance, December 31, 1999 $ 2,008.7 $ 1,267.3 $ 741.8 $ (.4)
============ ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
FLORIDA POWER CORPORATION
Statements of Income
For the years ended December 31, 1999, 1998 and 1997
(Dollars in millions)
1999 1998 1997
----------- ----------- -----------
OPERATING REVENUES: $ 2,632.6 $ 2,648.2 $ 2,448.4
----------- ----------- -----------
OPERATING EXPENSES:
Operation:
Fuel 596.0 595.7 458.1
Purchased power 414.1 433.8 490.6
Energy conservation costs 81.2 79.6 67.0
Operation and maintenance 466.4 471.6 422.3
Extended nuclear outage - O&M and replacement power -- 5.1 173.3
costs
Depreciation and amortization 347.5 347.1 325.9
Taxes other than income taxes 203.1 203.6 193.6
Income taxes 149.1 140.3 69.9
----------- ----------- -----------
2,257.4 2,276.8 2,200.7
----------- ----------- -----------
INCOME FROM OPERATIONS 375.2 371.4 247.7
----------- ----------- -----------
OTHER INCOME AND DEDUCTIONS:
Allowance for equity funds used during construction 3.8 7.5 5.4
Other income (expense), net 8.6 (1.7) (4.2)
----------- ----------- -----------
12.4 5.8 1.2
----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt 105.8 115.6 102.4
Other interest expense 18.2 20.9 14.9
----------- ----------- -----------
124.0 136.5 117.3
Allowance for borrowed funds used during construction (3.4) (9.4) (4.3)
----------- ----------- -----------
120.6 127.1 113.0
----------- ----------- -----------
NET INCOME 267.0 250.1 135.9
DIVIDENDS ON PREFERRED STOCK 1.5 1.5 1.5
----------- ----------- -----------
NET INCOME AFTER DIVIDENDS
ON PREFERRED STOCK $ 265.5 $ 248.6 $ 134.4
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
FLORIDA POWER CORPORATION
Balance Sheets
December 31, 1999 and 1998
(Dollars in millions)
1999 1998
------------ -------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Electric utility plant in service and held for future use $ 6,784.8 $ 6,307.8
Less - Accumulated depreciation 2,923.8 2,716.0
Accumulated decommissioning for nuclear plant 285.0 254.8
Accumulated dismantlement for fossil plants 132.5 130.7
------------ -------------
3,443.5 3,206.3
Construction work in progress 139.7 378.3
Nuclear fuel, net of amortization of $401.0
in 1999 and $377.2 in 1998 68.7 45.9
------------ -------------
3,651.9 3,630.5
Other property, net 10.0 11.5
------------ -------------
3,661.9 3,642.0
------------ -------------
CURRENT ASSETS:
Accounts receivable, less allowance for doubtful accounts of $4.0
in 1999 and $3.8 in 1998 210.8 206.0
Inventories, primarily at average cost:
Fuel 76.4 48.4
Materials and supplies 90.8 83.3
Deferred income taxes 41.4 56.0
Prepayments and other 101.3 69.5
------------ -------------
520.7 463.2
------------ -------------
DEFERRED CHARGES AND OTHER ASSETS:
Costs deferred pursuant to regulation:
Deferred purchased power contract termination costs 297.8 321.0
Other 94.0 113.6
Investments in nuclear plant decommissioning fund 377.2 332.1
Other 50.9 56.2
------------ -------------
819.9 822.9
------------ -------------
$ 5,002.5 $ 4,928.1
============ =============
The accompanying notes are an integral part of these financial statements.
FLORIDA POWER CORPORATION
Balance Sheets
December 31, 1999 and 1998
(Dollars in millions)
1999 1998
------------ -------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 1,004.4 $ 1,004.4
Retained earnings 880.6 815.7
------------ -------------
1,885.0 1,820.1
CUMULATIVE PREFERRED STOCK:
Without sinking funds 33.5 33.5
LONG-TERM DEBT 1,478.8 1,555.1
------------ -------------
TOTAL CAPITAL 3,397.3 3,408.7
------------ -------------
CURRENT LIABILITIES:
Accounts payable 152.9 154.2
Accounts payable to associated companies 23.1 27.2
Customers' deposits 105.6 104.1
Accrued other taxes 5.8 6.3
Accrued interest 59.6 55.8
Overrecovered utility fuel costs 31.6 22.2
Other 79.3 70.6
------------ -------------
457.9 440.4
Notes payable 153.1 47.3
Current portion of long-term debt 76.8 91.6
------------ -------------
687.8 579.3
------------ -------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 509.9 563.2
Unamortized investment tax credits 69.5 77.2
Other postretirement benefit costs 119.4 112.9
Other 218.6 186.8
------------ -------------
917.4 940.1
------------ -------------
$ 5,002.5 $ 4,928.1
============ =============
The accompanying notes are an integral part of these financial statements.
FLORIDA POWER CORPORATION
Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(Dollars in millions)
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income after dividends on preferred stock $ 265.5 $ 248.6 $ 134.4
Adjustments for noncash items:
Depreciation and amortization 385.0 382.7 333.8
Extended nuclear outage - replacement power costs -- -- 73.3
Deferred income taxes and investment tax credits, net (62.2) 36.5 (15.2)
Changes in working capital:
Accounts receivable (4.9) 37.9 (69.2)
Inventories (35.5) 4.2 6.7
Overrecovered/underrecovered utility fuel costs 9.4 51.7 (33.1)
Accounts payable (5.4) 11.8 51.7
Taxes payable 5.3 (4.2) (26.0)
Prepayments and other (23.5) (11.6) 12.3
Other operating activities 41.3 21.4 (35.9)
------------ ------------ ------------
575.0 779.0 432.8
------------ ------------ ------------
INVESTING ACTIVITIES:
Construction expenditures (357.7) (310.2) (387.2)
Allowance for borrowed funds used during construction (3.4) (9.4) (4.3)
Cogeneration facility acquisition and
contract termination costs -- (445.0)
Other investing activities (27.5) (56.8) (6.0)
------------ ------------ ------------
(388.6) (376.4) (842.5)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of long-term debt -- 144.1 447.7
Repayment of long-term debt (91.6) (259.3) (21.3)
Dividends paid on common stock (200.6) (154.9) (192.4)
Increase (decrease) in short-term debt 105.8 (132.5) 175.7
------------ ------------ ------------
(186.4) (402.6) 409.7
------------ ------------ ------------
NET INCREASE IN CASH AND EQUIVALENTS -- -- --
Beginning cash and equivalents -- -- --
------------ ------------ ------------
ENDING CASH AND EQUIVALENTS $ -- $ -- $ --
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 113.3 $ 112.6 $ 98.9
Income taxes (net of refunds) $ 210.9 $ 107.3 $ 108.4
Non-cash investing activities:
Property dividend to parent $ -- $ 41.1 $ --
The accompanying notes are an integral part of these financial statements.
FLORIDA POWER CORPORATION
Statements of Common Equity and Comprehensive Income
For the years ended December 31, 1999, 1998 and 1997
(Dollars in millions)
Accumulated
Other
Common Retained Comprehensive
Total Stock Earnings Income
--------- ---------- ---------- -------------
Balance, December 31, 1996 $ 1,825.5 $ 1,004.4 $ 821.1 $ --
Net income 134.4 134.4
Dividends paid to parent (192.4) (192.4)
--------- ---------- ---------- -------------
Balance, December 31, 1997 1,767.5 1,004.4 763.1 --
Net income 248.6 248.6
Dividends paid to parent (196.0) (196.0)
--------- ---------- ---------- -------------
Balance, December 31, 1998 1,820.1 1,004.4 815.7 --
Net income 265.5 265.5
Dividends paid to parent (200.6) (200.6)
--------- ---------- ---------- -------------
Balance, December 31, 1999 $ 1,885.0 $ 1,004.4 $ 880.6 $ --
========= ========== =========== =============
The accompanying notes are an integral part of these financial statements.
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- Florida Progress Corporation (the Company) is an exempt holding
company under the Public Utility Holding Company Act of 1935. Its two primary
subsidiaries are Florida Power Corporation (Florida Power) and Electric Fuels
Corporation (Electric Fuels).
Due to the geographical locations of Electric Fuels' Rail Services, Inland
Marine Transportation, and non-Florida Power portion of its Energy & Related
Services operations, it is necessary to report their results one month in
arrears.
The consolidated financial statements include the financial results of the
Company and its majority-owned operations. All significant intercompany balances
and transactions have been eliminated. Investments in 20% to 50%-owned joint
ventures are accounted for using the equity method.
Effective December 31, 1997, the Company deconsolidated the financial statements
of Mid-Continent, and the investment in Mid-Continent is accounted for under the
cost method.
Certain reclassifications have been made to prior-year amounts to conform to the
current year's presentation.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. This could affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. These estimates involve judgments with respect to various
items including future economic factors that are difficult to predict and are
beyond the control of the Company. Therefore actual results could differ from
these estimates.
Regulation -- Florida Power is regulated by the Florida Public Service
Commission (FPSC) and the Federal Energy Regulatory Commission (FERC). The
utility follows the accounting practices set forth in Financial Accounting
Standard (FAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." This standard allows utilities to capitalize or defer certain costs
or reduce revenues based on regulatory approval and management's ongoing
assessment that it is probable these items will be recovered or refunded through
the ratemaking process.
PROPERTY, PLANT AND EQUIPMENT
Electric Utility Plant -- Utility plant is stated at the original cost of
construction, which includes payroll and related costs such as taxes, pensions
and other fringe benefits, general and administrative costs, and an allowance
for funds used during construction. Substantially all of the utility plant is
pledged as collateral for Florida Power's first mortgage bonds.
The allowance for funds used during construction represents the estimated cost
of equity and debt for utility plant under construction. Florida Power is
permitted to earn a return on these costs and recover them in the rates charged
for utility services while the plant is in service. The average rate used in
computing the allowance for funds was 7.8% for 1999, 1998 and 1997.
The cost of nuclear fuel is amortized to expense based on the quantity of heat
produced for the generation of electric energy in relation to the quantity of
heat expected to be produced over the life of the nuclear fuel core.
Florida Power's annual provision for depreciation, including a provision for
nuclear plant decommissioning costs and fossil plant dismantlement costs,
expressed as a percentage of the average balances of depreciable utility plant,
was 4.6% for 1999, 4.7% for 1998 and 4.8% for 1997.
The fossil plant dismantlement accrual has been suspended for a period of four
years, effective July 1, 1997. (See Note 12 to the Financial Statements -
Extended Nuclear Outage.)
Florida Power charges maintenance expense with the cost of repairs and minor
renewals of property. The plant accounts are charged with the cost of renewals
and replacements of property units. Accumulated depreciation is charged with the
cost, less the net salvage, of property units retired.
In compliance with a regulatory order, Florida Power accrues a reserve for
maintenance and refueling expenses anticipated to be incurred during scheduled
nuclear plant outages.
Other Property -- Other property consists primarily of railcar and recycling
equipment, barges, towboats, land, mineral rights and telecommunications
equipment.
Depreciation on other property is calculated principally on the straight-line
method over the following estimated useful lives:
Railcar and recycling equipment 3 to 20 years
Barges and towboats 30 to 35 years
Telecommunications equipment 5 to 20 years
Electric Fuels owns, in fee, properties that contain estimated proven and
probable coal reserves of approximately 185 million tons, and controls, through
mineral leases, additional estimated proven and probable coal reserves of
approximately 30 million tons. Electric Fuels' reserves were evaluated and
summarized by an independent consultant. Depletion is provided on the units-of-
production method based upon the estimates of recoverable tons of clean coal.
Utility Revenues, Fuel and Purchased Power Expenses -- Revenues include amounts
resulting from fuel, purchased power and energy conservation cost recovery
clauses, which generally are designed to permit full recovery of these costs.
The adjustment factors are based on projected costs for a 12-month period. The
cumulative difference between actual and billed costs is included on the balance
sheet as a current regulatory asset or liability. Any difference is billed or
refunded to customers during the subsequent period.
In December 1997, Florida Power ended a three-year test period for residential
revenue decoupling, which was ordered by the FPSC and began in January 1995.
Revenue decoupling eliminated the effect of abnormal weather from revenues and
earnings. The regulatory asset at December 31, 1999, is currently being
recovered from customers over a period ending in the year 2000, through the
energy conservation cost recovery clause as directed by the FPSC decoupling
order.
Florida Power accrues the nonfuel portion of base revenues for services rendered
but unbilled.
Diversified Revenues -- Revenues are recognized at the time products are shipped
or as services are rendered. Leasing activities are accounted for in accordance
with FAS No. 13, "Accounting for Leases."
Income Taxes -- Deferred income taxes are provided on all significant temporary
differences between the financial and tax basis of assets and liabilities using
current tax rates.
Deferred investment tax credits, subject to regulatory accounting practices, are
amortized to income over the lives of the related properties.
Accounting for Certain Investments -- The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Dividend and interest income are recognized when earned.
Acquisitions -- During 1999 and 1998, subsidiaries of Electric Fuels acquired 8
and 13 businesses, respectively, in separate transactions. The cash paid for the
1999 and 1998 acquisitions was $55.9 million and $206.6 million, respectively.
The excess of the aggregate purchase price over the fair value of net assets
acquired was approximately $24.0 million and $87.8 million in 1999 and 1998,
respectively. The acquisitions were accounted for under the purchase method of
accounting and, accordingly, the operating results of the acquired businesses
have been included in the Company's consolidated financial statements since the
date of acquisition. Each of the acquired companies conducted operations similar
to those of the subsidiaries and has been integrated into Electric Fuels'
operations. The pro forma results of consolidated operations for 1999 and 1998,
assuming the 1999 acquisitions were made at the beginning of each year, would
not differ significantly from the historical results.
Goodwill -- Goodwill is being amortized on a straight-line basis over the
expected periods to be benefited, generally 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Environmental -- The Company accrues environmental remediation liabilities when
the criteria of FAS No. 5, "Accounting for Contingencies," have been met.
Environmental expenditures are expensed as incurred or capitalized depending on
their future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that have no future economic benefits are
expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessment and/or remediation is probable, and the costs can be
reasonably estimated.
Loss Contingencies -- Liabilities for loss contingencies arising from litigation
are recorded when it is probable that a liability has been incurred and the
amount can be reasonably estimated. The amount of the liability recorded
includes an estimate of outside legal fees directly associated with the loss
contingency.
New Accounting Standards -- In June 1999, the FASB issued FAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FAS No. 133," which deferred, for one year, the effective date
for the implementation of FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." FAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities and requires
that an entity recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair values. Florida Progress
will be required to adopt this standard for financial statements issued
beginning the first
quarter of fiscal year 2001. Florida Progress is currently evaluating the effect
the standard will have on its financial statements.
NOTE 2: PROPOSED SHARE EXCHANGE
On August 22, 1999, the Company entered into an Agreement and Plan of Exchange
(the Agreement) with Carolina Power & Light Company ("CP&L"), and CP&L Holdings,
Inc. (now CP&L Energy Inc. ("CP&L Energy")), a wholly owned subsidiary of CP&L.
CP&L is in the process of restructuring whereby CP&L Energy will become the
holding company of CP&L. All of the outstanding shares of Florida Progress would
be acquired by CP&L Energy in a statutory share exchange. For each share of
Florida Progress common stock, the Florida Progress shareholder will elect to
receive either $54.00 in cash or shares of CP&L Energy common stock, subject to
adjustment. The number of CP&L Energy shares to be exchanged for each Florida
Progress share will be between 1.1897 and 1.4543, based on the value of CP&L
Energy shares during a 20-day consecutive time period ending with the fifth
trading day immediately preceding the share exchange. The total of Florida
Progress shareholder elections are subject to the limitation that no more than
65 percent of the shares of Florida Progress stock will be exchanged for cash,
and no more than 35 percent of the shares of Florida Progress stock will be
exchanged for shares of CP&L Energy stock. The agreement was amended on March 3,
2000 to provide that Florida Progress shareholders would receive one contingent
value obligation for each share of Florida Progress common stock they own. Each
contingent value obligation will represent the right to receive contingent
payments based upon the net after-tax cash flow to CP&L Energy generated by four
synthetic fuel plants purchased by subsidiaries of Florida Progress in October
1999.
The transaction has been approved by the Boards of Directors of Florida
Progress, CP&L Energy and CP&L. The transaction is expected to close in the fall
of 2000, shortly after all the conditions to the Agreement, including the
approval of the shareholders of Florida Progress and CP&L, and the approval or
regulatory review by certain state and federal government agencies are met.
While there are no formal FPSC approvals for this transaction, Florida Progress
will continue to work with the state regulators regarding the ongoing
jurisdiction over Florida Power. Upon completion of the share exchange, CP&L
Energy will be subject to regulation as a holding company registered under the
Public Utility Holding Company Act of 1935.
The Boards of Directors of Florida Progress, CP&L Energy and CP&L may terminate
the Agreement under certain circumstances, including if the share exchange were
not completed on or before December 31, 2000, or by June 30, 2001, if the
necessary governmental approvals were not obtained by December 31, 2000, but all
other conditions have been or could be satisfied by that time. In the event that
Florida Progress or CP&L Energy terminate the Agreement in certain other limited
circumstances, Florida Progress would be required to pay a $150 million
termination fee, plus up to $25 million in fees and expenses.
In addition, Florida Progress' obligation to complete the share exchange is
conditioned upon the average closing price of CP&L Energy common stock for the
20-day trading period ending five trading days before the share exchange, not
being less than $30. If the average CP&L Energy stock price is less than $30,
Florida Progress is not obligated to complete the share exchange.
Both CP&L Energy and Florida Progress have agreed to certain undertakings and
limitations regarding the conduct of their respective businesses prior to the
closing of the transaction.
NOTE 3: FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Company using available
market information. Judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates may be different than
the amounts that the Company could realize in a current market exchange.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's marketable securities, long-term debt obligations and
Company-obligated mandatorily redeemable preferred securities.
The Company held only securities classified as available for sale at both
December 31, 1999 and 1998. At December 31, 1999 and 1998, the Company had the
following financial instruments with estimated fair values and carrying amounts:
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
(In millions) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------
ASSETS:
Investments in company-owned
life insurance $ 89.8 $ 89.8 $ 80.4 $ 80.4
Nuclear decommissioning fund 377.2 377.2 332.1 332.1
- ---------------------------------------------------------------------------
CAPITAL AND LIABILITIES:
Company-obligated mandatorily
redeemable preferred securities $ 300.0 $ 249.8 $ - $ -
Long-term debt:
Florida Power Corporation 1,555.6 1,512.3 1,646.7 1,740.4
Progress Capital Holdings 761.7 753.6 749.6 763.9
- ---------------------------------------------------------------------------
The change in the cash surrender value of the company's investment in company-
owned life insurance is reflected in other expense (income) in the accompanying
consolidated statements of income. The nuclear decommissioning fund consists
primarily of equity securities and municipal, government, corporate, and
mortgage-backed debt securities. The debt securities have a weighted average
maturity of approximately 10 years. The fund had gross unrealized gains at
December 31, 1999 and 1998 of $117.3 million and $97.1 million, respectively.
Gross unrealized losses for the same periods were not significant. The proceeds
from the sale of securities were $722.2 million, $231.7 million, and $496.2
million for the years ended December 31, 1999, 1998, and 1997, respectively. The
cost of securities sold was based on specific identification and resulted in
gross realized gains of $7.6 million, $1.5 million, and $1.9 million for the
years ended December 31, 1999, 1998, and 1997, respectively. All realized and
unrealized gains and losses are reflected as an adjustment to the accumulated
provision for nuclear decommissioning.
NOTE 4: INCOME TAXES
FLORIDA PROGRESS
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------
Components of income tax expense:
Payable currently:
Federal $109.6 $ 85.8 $ 86.6
State 20.5 15.3 10.5
- --------------------------------------------------------------------------
130.1 101.1 97.1
- --------------------------------------------------------------------------
Deferred, net:
Federal (28.0) 47.2 (22.4)
State (2.6) 8.2 (.5)
- --------------------------------------------------------------------------
(30.6) 55.4 (22.9)
- ----------------------------------------------------------------------
Amortization of investment
tax credits, net (7.8) (7.9) (7.8)
- ----------------------------------------------------------------------
$ 91.7 $148.6 $ 66.4
- ----------------------------------------------------------------------
FLORIDA POWER
(In millions) 1999 1998 1997
- ----------------------------------------------------------------------
Components of income tax expense:
Payable currently:
Federal $185.1 $ 89.2 $73.5
State 28.4 15.3 11.6
- ----------------------------------------------------------------------
213.5 104.5 85.1
- ----------------------------------------------------------------------
Deferred, net:
Federal (49.5) 37.7 (7.6)
State (4.9) 6.6 0.2
- ----------------------------------------------------------------------
(54.4) 44.3 (7.4)
- ----------------------------------------------------------------------
Amortization of investment
tax credits, net (7.8) (7.9) (7.8)
- ----------------------------------------------------------------------
$151.3 140.9 $69.9
- ----------------------------------------------------------------------
The primary differences between the statutory rates and the effective income tax
rates are detailed below:
FLORIDA PROGRESS
1999 1998 1997
- ----------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefits 2.9 3.5 5.4
Amortization of investment tax credits (1.9) (1.8) (6.4)
Synthetic fuel income tax credits (9.5) (.6) -
Other income tax credits (1.5) (1.3) (2.7)
Provision for loss (benefit) on investment
in life insurance subsidiary (2.7) - 24.9
Other .3 (.3) (1.8)
- ----------------------------------------------------------------------
Effective income tax rates 22.6% 34.5% 54.4%
- ----------------------------------------------------------------------
FLORIDA POWER
1999 1998 1997
- ----------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefits 3.7 3.6 3.7
Amortization of investment tax credits (1.9) (2.0) (3.8)
Other (0.5) (.4) (0.9)
- ----------------------------------------------------------------------
36.3% 36.2% 34.0%
- ----------------------------------------------------------------------
The following summarizes the components of deferred tax liabilities and assets
at December 31, 1999 and 1998:
FLORIDA PROGRESS
(In millions) 1999 1998
- ----------------------------------------------------------------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $604.9 $621.2
Investment in partnerships 25.5 19.2
Deferred book expenses 25.0 23.4
Other 21.2 38.1
- ---------------------------------------------------------------
Total deferred tax liabilities $676.6 $701.9
- ---------------------------------------------------------------
Deferred tax assets:
Accrued book expenses 105.9 108.7
Unbilled revenues 17.7 17.6
Other 29.0 36.1
- ---------------------------------------------------------------
Total deferred tax assets $152.6 $162.4
- ---------------------------------------------------------------
FLORIDA POWER
(In millions) 1999 1998
- ---------------------------------------------------------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment 540.9 $575.1
Deferred book expenses 25.0 23.3
Carrying value of securities over cost 25.9 22.0
Other 7.1 14.3
- ---------------------------------------------------------------
Total deferred tax liabilities $598.9 $634.7
- ---------------------------------------------------------------
Deferred tax assets:
Accrued book expenses 88.9 90.2
Unbilled revenues 17.7 17.6
Other 23.7 19.7
- ---------------------------------------------------------------
Total deferred tax assets $130.3 $127.5
- ---------------------------------------------------------------
At December 31, 1999 and 1998, Florida Power had net non current deferred tax
liabilities of $468.6 million and $563.1 million and net current deferred tax
assets of $10.2 million and $55.9 million, respectively. Florida Power expects
the results of future operations will generate sufficient taxable income to
allow for the utilization of deferred tax assets.
At December 31, 1999 and 1998, Florida Progress had net non current deferred tax
liabilities of $565.3 million and $595.4 million and net current deferred tax
assets of $41.3 million and $55.9 million, respectively. The Company believes it
is more likely than not that the results of future operations will generate
sufficient taxable income to allow for the utilization of deferred tax assets.
NOTE 5: NUCLEAR OPERATIONS
Florida Power incurred $100 million in additional operation and maintenance
expenses in 1997 as a result of Florida Power's Crystal River nuclear plant
(CR3) experiencing an extended outage beginning in September 1996. In January
1998, the NRC granted Florida Power permission to restart the plant. On February
15, 1998, the plant returned to service. With the exception of a planned
refueling outage in October 1999, CR3 has produced more than 100% of its rated
capacity since its restart in February 1998. (See Note 12 to the Financial
Statements.)
Jointly Owned Plant -- In September 1999, Florida Power purchased the City of
Tallahassee's 1.33% interest in the Crystal River nuclear plant, which was
approved by regulatory authorities. The following information relates to Florida
Power's 91.78% proportionate share of the nuclear plant at December 31, 1999,
and 90.45% proportionate share at December 31, 1998:
(In millions) 1999 1998
- -----------------------------------------------
Utility plant in service $773.6 $708.9
Construction work in progress 18.6 44.2
Unamortized nuclear fuel 68.7 45.9
Accumulated depreciation 400.6 368.7
Accumulated decommissioning 285.0 254.8
- -----------------------------------------------
Net capital additions for Florida Power were $39.2 million in 1999 and $30.0
million in 1998. Depreciation expense, exclusive of nuclear decommissioning, was
$34.3 million in 1999 and $32.8 million in 1998. Each co-owner provides for its
own financing of its investment. Florida Power's share of the asset balances and
operating costs is included in the appropriate consolidated financial
statements. Amounts exclude any allocation of costs related to common
facilities.
Decommissioning Costs -- Florida Power's nuclear plant depreciation expenses
include a provision for future decommissioning costs, which are recoverable
through rates charged to customers. Florida Power is placing amounts collected
in an externally managed trust fund. The recovery from customers, plus income
earned on the trust fund, is intended to be sufficient to cover Florida Power's
share of the future dismantlement, removal and land restoration costs. Florida
Power has a license to operate the nuclear unit through December 3, 2016, and
contemplates decommissioning beginning at that time.
In November 1995, the FPSC approved the current site-specific study that
estimates total future decommissioning costs at approximately $2 billion, which
corresponds to $481.2 million in 1999 dollars. Florida Power's share of the
total annual decommissioning expense is $21.7 million.
Florida Power is required to file a new site-specific study with the FPSC at
least every five years, which will incorporate current cost factors, technology
and radiological criteria. In November 1999, the FPSC approved Florida Power's
request to defer the filing of its nuclear decommissioning cost study for one
year, until December 2000.
Fuel Disposal Costs -- Florida Power has entered into a contract with the U.S.
Department of Energy (DOE) for the transportation and disposal of spent nuclear
fuel. Disposal costs for nuclear fuel consumed are being collected from
customers through the fuel adjustment clause at a rate of $.001 per net nuclear
kilowatt-hour sold and are paid to the DOE quarterly. Florida Power currently is
storing spent nuclear fuel on-site and has sufficient storage capacity in place
for fuel consumed through the year 2011.
NOTE 6: PREFERRED AND PREFERENCE STOCK AND SHAREHOLDER RIGHTS
The authorized capital stock of the Company includes 10 million shares of
preferred stock, without par value, including 2 million shares designated as
Series A Junior Participating Preferred Stock. No shares of the Company's
preferred stock are issued and outstanding. However, under the Company's
Shareholder Rights Agreement, each share of common stock has associated with it
approximately two-thirds of one right to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, subject to adjustment, which
is exercisable in the event of certain attempted business combinations. If
exercised, the rights would cause substantial dilution of ownership, thus
adversely affecting any attempt to acquire the Company on terms not approved by
the Company's Board of Directors. The rights have no voting or dividend rights
and expire in December 2001, unless redeemed earlier by the Company or
terminated pursuant to the CP&L share exchange. In connection with the CP&L
share exchange, the Company executed an amendment to the Shareholder Rights
Agreement which provides that the Rights will expire immediately prior to the
effective time of the exchange, and the exchange will not cause a triggering
event or the issuance of any preferred stock.
The authorized capital stock of Florida Power includes three classes of
preferred stock: 4 million shares of Cumulative Preferred Stock, $100 par value;
5 million shares of Cumulative Preferred Stock, without par value; and 1 million
shares of Preference Stock, $100 par value. No shares of Florida Power's
Cumulative Preferred Stock, without par value, or Preference Stock are issued
and outstanding.
Cumulative Preferred Stock, $100 par value, for Florida Power is detailed below:
Current Shares Outstanding at
Dividend Redemption Issued and December 31,
Rate Price Outstanding 1999 & 1998
- ------------------------------------------------------------------
(In millions)
4.00% $104.25 39,980 $ 4.0
4.40% $102.00 75,000 7.5
4.58% $101.00 99,990 10.0
4.60% $103.25 39,997 4.0
4.75% $102.00 80,000 8.0
- ------------------------------------------------------------------
334,967 $33.5
- ------------------------------------------------------------------
All Cumulative Preferred Stock series are without sinking funds and are not
subject to mandatory redemption.
NOTE 7: COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY INCOME
PREFERRED SECURITIES (QUIPS) OF A SUBSIDIARY TRUST HOLDING SOLELY
FLORIDA PROGRESS GUARANTEED SUBORDINATED DEFERRABLE INTEREST NOTES
In April 1999, FPC Capital I (the Trust), an indirect wholly owned subsidiary of
the Company, issued 12 million shares of $25 par cumulative Company-obligated
mandatorily redeemable preferred securities ("Preferred Securities") due 2039,
with an aggregate liquidation value of $300 million and a quarterly distribution
rate of 7.10%. Currently, all 12 million shares of the Preferred Securities that
were issued are outstanding. Concurrent with the issuance of the Preferred
Securities, the Trust issued to Florida Progress Funding Corporation (Funding
Corp.) all of the common securities of the Trust (371,135 shares), for $9.3
million. Funding Corp. is a direct wholly owned subsidiary of the Company.
The existence of the Trust is for the sole purpose of issuing the Preferred
Securities and the common securities and using the proceeds thereof to purchase
from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes
("subordinated notes") due 2039, for a principal amount of $309.3 million. The
subordinated notes and the Notes Guarantee (as discussed below) are the sole
assets of the Trust. Funding Corp.'s proceeds from the sale of the subordinated
notes were advanced to Progress Capital Holdings and used for general corporate
purposes including the repayment of a portion of certain outstanding short-term
bank loans and commercial paper.
The Company has fully and unconditionally guaranteed the obligations of Funding
Corp. under the subordinated notes (the Notes Guarantee). In addition, the
Company has guaranteed the payment of all distributions required to be made by
the Trust, but only to the extent that the Trust has funds available for such
distributions (Preferred Securities Guarantee). The Preferred Securities
Guarantee, considered together with the Notes Guarantee, constitutes a full and
unconditional guarantee by the Company of the Trust's obligations under the
Preferred Securities.
The subordinated notes may be redeemed at the option of Funding Corp. beginning
in 2004 at par value plus accrued interest through the redemption date. The
proceeds of any redemption of the subordinated notes will be used by the Trust
to redeem proportional amounts of the Preferred Securities and common securities
in accordance with their terms. Upon liquidation or dissolution of Funding
Corp., holders of the Preferred Securities would be entitled to the liquidation
preference of $25 per share plus all accrued and unpaid dividends thereon to the
date of payment.
NOTE 8: DEBT
The Company's long-term debt at December 31, 1999 and 1998 is detailed below:
(In millions) Interest Rate (a) 1999 1998
- --------------------------------------------------------------------------------------------------------------
FLORIDA POWER CORPORATION:
First mortgage bonds, maturing 2003-2023 6.94% $ 510.0 $ 585.0
Pollution control revenue bonds, maturing 2014-2027 6.59% 240.9 240.9
Medium-term notes, maturing 2000-2028 6.64% 607.9 624.5
Commercial paper, supported by revolver maturing November 30, 2003 5.93% 200.0 200.0
Discount being amortized over term of bonds (3.2) (3.7)
- --------------------------------------------------------------------------------------------------------------
1,555.6 1,646.7
PROGRESS CAPITAL HOLDINGS:
Medium-term notes, maturing 2000-2008 6.63% 444.0 444.0
Commercial paper, supported by revolver maturing November 30, 2003 6.09% 283.5 300.0
Other debt, maturing 2000-2006 6.88% 34.2 5.6
- --------------------------------------------------------------------------------------------------------------
2,317.3 2,396.3
Less: Current portion of long-term debt 163.2 145.9
- --------------------------------------------------------------------------------------------------------------
$2,154.1 $2,250.4
- --------------------------------------------------------------------------------------------------------------
(a) Weighted average interest rate at December 31, 1999.
The Company's consolidated subsidiaries have lines of credit totaling $800
million, which are used to support the issuance of commercial paper. The lines
of credit were not drawn on as of December 31, 1999. Interest rate options under
the lines of credit arrangements vary from subprime or money market rates to the
prime rate. Banks providing lines of credit are compensated through fees.
Commitment fees on lines of credit vary between .08 and .12 of 1%.
The lines of credit consist of four revolving bank credit facilities, two each
for Florida Power and Progress Capital Holdings, Inc. (Progress Capital). The
Florida Power facilities consist of $200 million with a 364-day term and $200
million with a remaining four-year term. The Progress Capital facilities consist
of $100 million with a 364-day term and $300 million with a remaining four-year
term. In 1999, both 364-day facilities were extended to November 2000. Based on
the duration of the underlying backup credit facilities, $483.5 million and $500
million of outstanding commercial paper at December 31, 1999 and 1998,
respectively, are classified as long-term debt. As of December 31, 1999, Florida
Power and Progress Capital had an additional $153.1 million and $0 million,
respectively, of outstanding commercial paper classified as short-term debt.
Progress Capital has uncommitted bank bid facilities authorizing it to borrow
and re-borrow, and have outstanding at any time, up to $300 million. As of
December 31, 1999 and 1998, $0 million and $150 million, respectively, was
outstanding under these bid facilities.
Florida Power has a public medium-term note program providing for the issuance
of either fixed or floating interest rate notes. These notes may have maturities
ranging from nine months to 30 years. A balance of $250 million is available for
issuance at December 31, 1999.
In March 1998, Florida Power redeemed all of its $150 million principal amount
of first mortgage bonds, 8 5/8% series due November 2021 at a redemption price
of 105.17% of the principal amount thereof. Substantially all of this redemption
was funded from the net proceeds of $150 million of medium-term notes issued in
February 1998, which bear an interest rate of 6 3/4% and mature in February
2028. Florida Power also redeemed, in November 1998, an additional $100 million
of first mortgage bonds. The entire $50 million principal amount of the 7 3/8%
series was redeemed at a price of 100.93%, and the entire $50 million principal
amount of the 7 1/4% series was redeemed at a price of 100.86%. Both issues were
due in 2002. The redemption was funded from internally generated funds and
commercial paper.
Florida Power has registered $370 million of first mortgage bonds, which are
unissued and available for issuance.
Progress Capital has a private medium-term note program providing for the
issuance of either fixed or floating interest rate notes, with maturities
ranging from nine months to 30 years. A balance of $135 million is available for
issuance under this program.
The combined aggregate maturities of long-term debt for 2000 through 2004 are
$163.2 million, $185.9 million, $85.3 million, $762.3 million and $71.3 million,
respectively.
Florida Progress has unconditionally guaranteed the payment of Progress
Capital's debt.
NOTE 9: STOCK-BASED COMPENSATION
The Company's Long-Term Incentive Plan (LTIP) authorizes the granting of up to
2,250,000 shares of common stock to certain executives in various forms,
including stock options, stock appreciation rights, restricted stock and
performance shares. A Company subsidiary also grants performance units under a
separate LTIP. Currently, only performance shares, performance units and
restricted stock have been granted. Upon achievement of certain criteria for a
three-year performance cycle, the performance shares or units earned can range
from 0% to 300% of the performance shares or units granted plus dividend
equivalents, and are payable in the form of shares of common stock of Florida
Progress or cash. If certain stock ownership requirements have been met, certain
executives are also eligible to receive an additional
award of restricted stock, which will only be awarded if the performance shares
or units earned are taken in company stock. Restricted stock fully vests 10
years from the date of award, or upon change of control, or retirement after
reaching age 62. The Company accounts for its LTIPs in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," as allowed under FAS No. 123, "Accounting for Stock Based
Compensation." Performance shares, performance units and restricted stock
granted with the fair value at the grant date is detailed below:
Performance Restricted
Year Shares/Units Granted Stock Granted Fair value
- ----------------------------------------------------------------------
1999 124,890 74,192 $8,841,740
1998 139,860 - $5,375,869
1997 144,126 - $4,559,258
- ----------------------------------------------------------------------
Compensation costs for performance shares, performance units and restricted
stock have been recognized at the fair market value of the Company's stock and
are recognized over the performance cycle. Compensation cost related to the
LTIPs for 1999, 1998, and 1997, was $19 million, $9 million, and $4 million,
respectively. If the accounting under FAS No. 123 had been utilized, there
would not have been any difference in the results of operations or earnings per
share.
NOTE 10: BENEFIT PLANS
Pension Benefits -- The Company and some of its subsidiaries have two
noncontributory defined benefit pension plans covering most employees. The
Company also has two supplementary defined benefit pension plans that provide
benefits to higher-level employees. Effective January 1, 1998, one pension plan
was split into two separate plans, one covering eligible bargaining unit
employees and the other covering all other eligible employees. Plan assets were
allocated to each plan in accordance with applicable law.
Other Postretirement Benefits -- The Company and some of its subsidiaries also
provide certain health care and life insurance benefits for retired employees
that reach retirement age while working for the Company.
Shown below are the components of the net pension expense and net postretirement
benefit expense calculations for 1999, 1998 and 1997:
Pension Benefits Other Postretirement Benefits
(In millions) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Service cost $ 22.0 $ 22.3 $ 18.7 $ 3.5 $ 3.5 $ 3.2
Interest cost 39.4 37.7 34.9 10.4 10.5 10.4
Expected return on plan assets (78.4) (68.5) (58.4) (.4) (.3) (.4)
Net amortization and deferral (15.1) (12.5) (6.5) 3.0 3.2 3.4
- -------------------------------------------------------------------------------------------------------
Net cost/(benefit) recognized $(32.1) $(21.0) $(11.3) $16.5 $16.9 $16.6
- -------------------------------------------------------------------------------------------------------
The following weighted average actuarial assumptions at December 31 were used in
the calculation of the year-end funded status:
Pension Benefits Other Postretirement Benefits
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Discount rate 7.50% 7.00% 7.25% 7.50% 7.00% 7.25%
Expected long-term rate of return 9.00% 9.00% 9.00% 5.00% 5.00% 5.00%
Rate of compensation increase:
Bargaining unit employees 3.50% 3.50% 4.50% 3.50% 3.50% 4.50%
Nonbargaining unit employees 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Nonqualified plans 4.50% 4.00% 4.00% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------
The following summarizes the change in the benefit obligation and plan assets
for both the pension plan and postretirement benefit plan for 1999 and 1998:
Pension Benefits Other Postretirement Benefits
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 574.2 $ 523.9 $ 161.5 $ 153.2
Service cost 22.0 22.3 3.5 3.5
Interest cost 39.4 37.7 10.4 10.5
Plan amendment 9.5 - (2.4) -
Actuarial (gain)/loss (34.9) 16.1 (10.3) 1.2
Benefits paid (28.0) (25.8) (8.2) (6.9)
- --------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 582.2 574.2 154.5 161.5
- --------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 885.0 769.0 8.1 6.4
Return on plan assets (net of expenses) 179.9 140.2 (.2) .4
Employer contributions - - 1.3 1.3
Benefits paid (25.9) (24.2) - -
- --------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,039.0 885.0 9.2 8.1
- --------------------------------------------------------------------------------------------------------------
Funded status 456.8 310.8 (145.3) (153.4)
Unrecognized transition (asset) obligation (15.5) (20.5) 45.4 51.4
Unrecognized prior service cost 12.0 13.3 - -
Unrecognized net actuarial gain (399.2) (283.5) (23.2) (14.1)
- --------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 54.1 $ 20.1 $(123.1) $(116.1)
- --------------------------------------------------------------------------------------------------------------
Between 1996 and 1999, the Company set assets aside in a rabbi trust for the
purpose of providing benefits to the participants in the supplementary defined
benefit retirement plans and certain other plans for higher level employees.
The assets of the rabbi trust are not reflected as plan assets because the
assets could be subject to creditors' claims. The assets and liabilities of the
supplementary defined benefit retirement plans are included in Other Assets and
Other Liabilities on the accompanying Consolidated Balance Sheets.
The assumed pre-medicare and post medicare health care cost trend rates for 2000
are 7.67% and 6.42%, respectively. Both rates ultimately decrease to 5.25% in
2005 and thereafter. A one-percentage point increase or decrease in the assumed
health care cost trend rate would change the total service and interest cost by
approximately $1 million and the postretirement benefit obligation by
approximately $12 million.
Due to different retail and wholesale regulatory rate requirements, Florida
Power began making quarterly contributions for the postretirement benefit plan
in 1995 to an irrevocable external trust fund for wholesale ratemaking, while
continuing to accrue post-retirement benefit costs to an unfunded reserve for
retail ratemaking.
NOTE 11: BUSINESS SEGMENTS
The Company's principal business segment is Florida Power, an electric utility
engaged in the generation, purchase, transmission, distribution and sale of
electricity primarily in Florida. The other reportable business segments are
Electric Fuels' Energy & Related Services, Rail Services and Inland Marine
Transportation units. Energy & Related Services includes coal and synthetic fuel
operations, natural gas production and sales, river terminal services and off-
shore marine transportation. Rail Services' operations include railcar repair,
rail parts reconditioning and sales, railcar leasing and sales, providing rail
and track material, and scrap metal recycling. Inland Marine provides
transportation of coal, agricultural and other dry-bulk commodities as well as
fleet management services. The other category consists primarily of the
Company's investment in FPC Capital Trust, which holds the Preferred Securities,
Progress Telecommunications Corp., the Company's telecommunications subsidiary,
and the parent holding company, Florida Progress Corporation, which allocates a
portion of its operating expenses to business segments.
The Company's business segment information for 1999, 1998 and 1997 is summarized
below. The Company's significant operations are geographically located in the
United States with limited operations in Mexico and Canada. The Company's
segments are based on differences in products and services, and therefore no
additional disclosures are presented. Intersegment sales and transfers consist
primarily of coal sales from Electric Fuels to Florida Power. The price
Electric Fuels charges Florida Power is based on market rates for coal
procurement and for water-borne transportation under a methodology approved by
the FPSC. Rail transportation is also based on market rates plus a return
allowed by the FPSC on equity utilized in transporting coal to Florida Power.
The allowed rate of return is currently 12%. No single customer accounted for
10% or more of unaffiliated revenues.
Energy & Inland
Related Rail Marine
(In millions) Utility Services Services Transportation Other Eliminations
Consolidated
- ---------------------------------------------------------------------------------------------------------------------
1999
Revenues $2,632.6 $180.3 $880.2 $141.0 $ 6.4 $ 4.6 $3,845.1
Intersegment revenues - 262.9 1.5 14.5 (8.9) (270.0) -
Depreciation and amortization 385.0 21.1 27.5 5.5 7.1 - 446.2
Interest expense 124.0 6.9 32.3 .6 26.6 (16.8) 173.6
Income tax expense/(benefit) 151.3 (39.2) 16.6 6.8 (43.3) (.5) 91.7
Segment net income (loss) 265.5 38.9 21.3 10.7 (20.7) (.8) 314.9
Total assets 5,002.5 390.5 815.0 106.5 720.1 (506.4) 6,528.2
Property additions 362.5 39.5 61.8 61.4 48.8 - 574.0
- ---------------------------------------------------------------------------------------------------------------------
1998
Revenues $2,648.2 $173.8 $658.5 $124.6 $ 10.9 $ 4.3 $3,620.3
Intersegment revenues - 273.9 1.3 14.0 - (289.2) -
Depreciation and amortization 382.7 14.4 19.4 4.5 3.6 - 424.6
Interest expense 136.5 5.8 21.3 4.4 20.8 (1.7) 187.1
Income tax expense/(benefit) 141.0 6.3 12.3 6.3 (17.3) - 148.6
Segment net income (loss) 248.6 20.4 15.9 10.3 (13.5) - 281.7
Total assets 4,928.1 316.5 680.0 99.5 334.0 (197.3) 6,160.8
Property additions 326.0 32.0 91.0 93.6 .7 - 543.3
- ---------------------------------------------------------------------------------------------------------------------
1997
Revenues $2,448.4 $165.6 $477.1 $105.5 $ 115.7 $ 4.1 $3,316.4
Intersegment revenues - 286.0 1.3 14.2 - (301.5) -
Depreciation and amortization 333.8 11.7 11.2 4.3 3.2 - 364.2
Interest expense 117.3 6.5 13.9 2.5 19.1 (.6) 158.7
Income tax expense/(benefit) 69.9 8.4 9.8 3.3 (25.0) - 66.4
Segment net income (loss) 134.4 16.8 13.3 5.9 (116.1) - 54.3
Total assets 4,900.8 299.2 385.3 138.9 210.4 (174.6) 5,760.0
Property additions 395.0 16.8 41.6 59.0 1.2 - 513.6
- ---------------------------------------------------------------------------------------------------------------------
NOTE 12: REGULATORY MATTERS
Rates -- Florida Power's retail rates are set by the FPSC, while its wholesale
rates are governed by the FERC. Florida Power's last general retail rate case
was approved in 1992 and allowed a 12% regulatory return on equity with an
allowed range between 11% and 13%.
Regulatory Assets and Liabilities -- Florida Power has total regulatory assets
(liabilities) at December 31, 1999 and 1998 as detailed below:
(In millions) 1999 1998
- -----------------------------------------------------------------
Deferred purchased power
contract termination costs $297.8 $321.0
Replacement fuel (extended nuclear outage) 23.6 39.3
Overrecovered utility fuel costs (31.6) (22.2)
Unamortized loss on reacquired debt 23.3 25.2
Other regulatory assets/(liabilities), net (14.4) 7.8
- ----------------------------------------------------------------
Net regulatory assets $298.7 $371.1
- ----------------------------------------------------------------
The utility expects to fully recover these assets and refund the liabilities
through customer rates under current regulatory practice.
If Florida Power no longer applied FAS No. 71 due to competition, regulatory
changes or other reasons, the utility would make certain adjustments. These
adjustments could include the write-off of all or a portion of its regulatory
assets and liabilities, the evaluation of utility plant, contracts and
commitments and the recognition, if necessary, of any losses to reflect market
conditions.
Tiger Bay Buy-Out -- In 1997, Florida Power bought out the Tiger Bay purchased
power contracts for $370 million and acquired the cogeneration facility for $75
million, for a total of $445 million. Of the $370 million of contract
termination costs, $350 million was recorded as a regulatory asset and the
remaining $20 million was written off. Florida Power recorded $75 million as
electric plant.
The regulatory asset is being recovered pursuant to an agreement between Florida
Power and several intervening parties, which was approved by the FPSC in June
1997. The amortization of the regulatory asset is calculated using revenues
collected under the fuel adjustment clause as if the purchased power agreements
related to the facility were still in effect, less the actual fuel costs and the
related debt interest expense. This will continue until the regulatory asset is
fully amortized. Florida Power has the option to accelerate the amortization.
Approximately $23 million and $27.2 million of amortization expense was recorded
in 1999 and 1998, respectively.
In November 1999, Florida Power received approval from the FPSC to defer nonfuel
revenues towards the development of a plan that would allow customers to realize
the benefits earlier than if they are used to accelerate the amortization of the
Tiger Bay regulatory asset. The request would require a plan to be submitted to
the FPSC by August 1, 2000. If the plan is not filed by August 1, 2000, or
filed but not approved by the FPSC, Florida Power would apply the deferred
revenues of $44.4 million, plus accrued interest, to accelerate the amortization
of the Tiger Bay regulatory asset.
A similar plan was approved by the FPSC in December 1998. Florida Power was
unable to identify any rate initiatives that might allow its ratepayers to
receive these benefits sooner and, in June 1999, recognized $10.1 million of
revenue and recorded $10.1 million, plus interest, of amortization against the
Tiger Bay regulatory asset.
Extended Nuclear Outage -- In June 1997, a settlement agreement between Florida
Power and all parties who intervened in Florida Power's request to recover
replacement fuel and purchased power costs resulting from the extended outage of
its nuclear plant was approved by the FPSC. The plant was kept off-line in
October 1996 to address certain design issues related to its safety systems. In
late January 1998, Florida Power notified the NRC that it had completed all of
the requirements and was subsequently granted permission to restart the plant.
The plant returned to service in February 1998.
Florida Power incurred approximately $5 million in 1998 and $174 million in 1997
in total system replacement power costs. In accordance with the settlement
agreement, Florida Power recorded a charge of approximately $5 million in 1998
and $73 million in 1997 for retail replacement power costs incurred that will
not be recovered through its fuel cost recovery clause. Florida Power recovered
approximately $38 million through its fuel cost recovery clause. Approximately
$63 million of replacement power costs
were recorded as a regulatory asset in 1997. The regulatory asset is being
amortized for a period of up to four years. The amortization is being recovered
by the suspension of fossil plant dismantlement accruals during the amortization
period.
The parties to the settlement agreement agreed not to seek or support any
increase or reduction in Florida Power's base rates or the authorized range of
its return on equity during the four-year amortization period. The settlement
agreement also provided that for purposes of monitoring Florida Power's future
earnings, the FPSC will exclude the nuclear outage costs when assessing Florida
Power's regulatory return on equity. The agreement resolved all present and
future disputed issues between the parties regarding the extended outage of the
nuclear plant.
NOTE 13: COMMITMENTS AND CONTINGENCIES
Fuel, Coal and Purchased Power Commitments -- Florida Power has entered into
various long-term contracts to provide the fossil and nuclear fuel requirements
of its generating plants and to reserve pipeline capacity for natural gas. In
most cases, such contracts contain provisions for price escalation, minimum
purchase levels and other financial commitments. Estimated annual payments,
based on current market prices, for Florida Power's firm commitments for fuel
purchases and transportation costs, excluding delivered coal and purchased
power, are $63 million, $70 million, $60 million, $63 million and $64 million
for 2000 through 2004, respectively, and $605 million in total thereafter.
Additional commitments will be required in the future to supply Florida Power's
fuel needs.
Electric Fuels has two coal supply contracts with Florida Power, the provisions
of which require Florida Power to buy and Electric Fuels to supply substantially
all of the coal requirements of four of Florida Power's power plants, two
through 2002 and two through 2004. In connection with these contracts, Electric
Fuels has entered into several contracts with outside parties for the purchase
of coal. The annual obligations for coal purchases and transportation under
these contracts are $75.8 million, $52.5 million and $26.5 million for 2000
through 2002, respectively, with no further obligations thereafter. The total
cost incurred for these commitments was $125.3 million in 1999, $117.7 million
in 1998 and $156.8 million in 1997.
Florida Power has long-term contracts for about 460 megawatts of purchased power
with other utilities, including a contract with The Southern Company for
approximately 400 megawatts of purchased power annually through 2010. This
represents less than 5% of Florida Power's total current system capacity.
Florida Power has an option to lower these Southern purchases to approximately
200 megawatts annually with a three-year notice. The purchased power from
Southern is supplied by generating units with a capacity of approximately 3,500
megawatts and is guaranteed by Southern's entire system, totaling more than
30,000 megawatts.
As of December 31, 1999, Florida Power has ongoing purchased power contracts
with certain qualifying facilities for 871 megawatts of capacity with expiration
dates ranging from 2002 to 2025. The purchased power contracts provide for
capacity and energy payments. Energy payments are based on the actual power
taken under these contracts. Capacity payments are subject to the qualifying
facilities meeting certain contract performance obligations. In most cases,
these contracts account for 100% of the generating capacity of each of the
facilities. Of the 871 megawatts under contract, 831 megawatts currently are
available to Florida Power. All commitments have been approved by the FPSC.
The FPSC allows the capacity payments to be recovered through a capacity cost
recovery clause, which is similar to, and works in conjunction with, energy
payments recovered through the fuel cost recovery clause.
Florida Power incurred purchased power capacity costs totaling $240.6 million in
1999, $260.1 million in 1998 and $292.3 million in 1997. The following table
shows minimum expected future capacity payments for purchased power commitments.
Because the purchased power commitments have relatively long durations, the
total present value of these payments using a 10% discount rate also is
presented.
Purchased Power Capacity Payments
---------------------------------
(In millions) Utilities Cogenerators Total
- --------------------------------------------------------------------------------
2000 $ 54 $ 224 $ 278
2001 53 230 283
2002 53 236 289
2003 29 244 273
2004 29 255 284
2005-2025 159 5,300 5,459
- --------------------------------------------------------------------------------
Total $377 $6,489 $6,866
- --------------------------------------------------------------------------------
Total net present value $2,556
- --------------------------------------------------------------------------------
Leases -- Electric Fuels has several noncancelable operating leases, primarily
for transportation equipment, with varying terms extending to 2015, and
generally require Electric Fuels to pay all executory costs such as maintenance
and insurance. Some rental payments include minimum rentals plus contingent
rentals based on mileage. Contingent rentals were not significant. The minimum
future lease payments under noncancelable operating leases, with initial terms
in excess of one year, including the synthetic lease described below, are $65.8
million, $59.8 million, $50.8 million, $48.5 million and $46.1 million for 2000
through 2004, respectively, with a $528.4 million total obligation thereafter.
The total costs incurred under these commitments were $51.1 million, $30.9
million and $34.8 million during 1999, 1998 and 1997, respectively.
On August 6, 1998, MEMCO Barge Line, Inc. (MEMCO), a wholly owned subsidiary of
Electric Fuels, entered into a synthetic lease financing, accomplished via a
sale and leaseback, for an aggregate of approximately $175 million in inland
river barges and $25 million in towboats (vessels). MEMCO sold and leased back
$153 million of vessels as of December 31, 1998, and the remaining $47 million
of vessels in May 1999. The lease (charter) is an operating lease for financial
reporting purposes and a secured financing for tax purposes.
The term of the noncancelable charter expires on December 30, 2012, and provides
MEMCO one 18-month renewal option on the same terms and conditions. MEMCO is
responsible for all executory costs, including insurance, maintenance and taxes,
in addition to the charter payments. MEMCO has options to purchase the vessels
throughout the term of the charter, as well as an option to purchase at the
termination of the charter. Assuming MEMCO exercises no purchase options during
the term of the charter, the purchase price for all vessels totals to $141.8
million at June 30, 2014. In the event that MEMCO does not exercise its
purchase option for all vessels, it will be obligated to remarket the vessels
and, at the expiration of the charter, pay a maximum residual guarantee amount
of $89.3 million.
The minimum future charter payments as of December 31, 1999, are $15.3 million,
$15.4 million, $15.4 million, $15.8 million and $15.8 million for 2000 through
2004 and $156.4 million thereafter (excluding the purchase option payment). All
MEMCO payment obligations under the transaction documents are unconditionally
guaranteed by Progress Capital; those obligations are guaranteed by Florida
Progress.
Construction Program -- Substantial commitments have been made in connection
with the Company's construction program. For the year 2000, Florida Power has
projected annual construction expenditures of $291 million, primarily for
electric plant. In 2000, Electric Fuels capital expenditures are expected to be
approximately $84 million, which represents additional investment in the Rail
Services, Inland Marine and Energy & Related Services units. For the year 2000,
Progress Telecom has projected annual capital expenditures of $35 million
primarily for expansion of the current fiber optic network.
Insurance -- Florida Progress and its subsidiaries utilize various risk
management techniques to protect certain assets from risk of loss, including the
purchase of insurance. Risk avoidance, risk transfer and self-insurance
techniques are utilized depending on the Company's ability to assume risk, the
relative cost and availability of methods for transferring risk to third
parties, and the requirements of applicable regulatory bodies.
Florida Power self-insures its transmission and distribution lines against loss
due to storm damage and other natural disasters. Pursuant to a regulatory
order, Florida Power is accruing $6 million annually to a storm damage reserve
and may defer any losses in excess of the reserve. The reserve balance at
December 31, 1999 and 1998 was $25.6 million and $24.1 million, respectively.
Under the provisions of the Price Anderson Act, which limits liability for
accidents at nuclear power plants, Florida Power, as an owner of a nuclear
plant, can be assessed for a portion of any third-party liability claims arising
from an accident at any commercial nuclear power plant in the United States. If
total third-party claims relating to a single nuclear incident exceed $200
million (the amount of currently available commercial liability insurance),
Florida Power could be assessed up to $88.1 million per incident, with a maximum
assessment of $10 million per year.
Florida Power also maintains nuclear property damage insurance and
decontamination and decommissioning liability insurance. Effective October 1,
1999, the total limit purchased for this type of insurance was reduced from $2.1
billion to $1.6 billion. The reduction was based on a review of the potential
property damage exposure, the legal minimum required to be carried, and the
amount of insurance being purchased by other owners of single unit nuclear
sites. The first $500 million layer of insurance is purchased in the commercial
insurance market with the remaining excess coverage purchased from Nuclear
Electric Insurance Ltd. (NEIL). Florida Power is self-insured for any losses
that are in excess of this coverage. Under the terms of the NEIL policy, Florida
Power could be assessed up to a maximum of $5.3 million in any policy year if
losses in excess of NEIL's available surplus are incurred.
Florida Power has never been assessed under these nuclear indemnities or
insurance policies.
Contaminated Site Cleanup -- The Company is subject to regulation with respect
to the environmental impact of its operations. The Company's disposal of
hazardous waste through third-party vendors can result in costs to clean up
facilities found to be contaminated. Federal and state statutes authorize
governmental agencies to compel responsible parties to pay for cleanup of these
hazardous waste sites.
Florida Power and former subsidiaries of the Company, whose properties were sold
in prior years, have been identified by the U.S. Environmental Protection Agency
(EPA) as Potentially Responsible Parties (PRPs) at certain sites. Liability for
the cleanup of costs at these sites is joint and several.
One of the sites that Florida Power previously owned and operated is located in
Sanford, Florida. There are five parties, including Florida Power, that have
been identified as PRPs at the Sanford site. A Participation Agreement was
signed among the PRPs of the Sanford site to allocate $1.5 million to
perform a Remedial Investigation, Baseline Risk Assessment and Feasibility Study
("RI/FS"). Florida Power is liable for approximately 40% of the costs for the
RI/FS as agreed to in this Participation Agreement. In July 1999, the initial
draft of the RI/FS was submitted to EPA. Discussions with EPA regarding future
remedial action should commence in the first quarter 2000.
The PRP group is expected to negotiate a second Participation Agreement that
will define and allocate Remedial Design and Remedial Action costs among the
participants for Phase I of three potential phases of cleanup. Cleanup will be
addressed in phases for project management purposes. Florida Power's future
cost share allocation is expected to be identified by the second quarter 2000.
The discussions and resolution of liability for cleanup costs could cause
Florida Power to increase the estimate of its liability for those costs.
Although estimates of any additional costs are not currently available, the
outcome is not expected to have a material effect on Florida Progress'
consolidated financial position, results of operations or liquidity.
In December 1998, the EPA conducted an Expanded Site Inspection (ESI) at a
former Florida Power plant site near Inglis, Florida. Soil and groundwater
samples were obtained from the Florida Power property, as well as sediment
samples from the adjacent Withlacoochee River. A final copy of the report,
along with a Request for Information under CERCLA was received in December 1999.
Upon review of the Company's reply, EPA's conclusions may change the current
hazard ranking and ultimately result in the Inglis site being placed on the
National Priorities List (NPL). If this property were placed on the NPL, then
EPA might conduct remediation actions at the site and seek repayment of those
costs as well as investigative costs from any PRPs. Past costs currently exceed
$3.5 million with FPC identified as the only major viable business associated
with this site.
In addition to these designated sites, there are other sites where Florida
Progress may be responsible for additional environmental cleanup. Florida
Progress estimates that its share of liability for cleaning up all designated
sites ranges from $9.0 million to $13.0 million. It has accrued $9.0 million
against these potential costs. There can be no assurance that the Company's
estimates will not change in the future.
LEGAL MATTERS
Age Discrimination Suit -- Florida Power and Florida Progress have been named
defendants in an age discrimination lawsuit. The number of plaintiffs remains
at 116, but four of those plaintiffs have had their federal claims dismissed and
74 others have had their state age claims dismissed. While no dollar amount was
requested, each plaintiff seeks back pay, reinstatement or front pay through
their projected dates of normal retirement, costs and attorneys' fees. In
October 1996, the federal Court approved an agreement between the parties to
provisionally certify this case as a class action suit under the Age
Discrimination in Employment Act. Florida Power filed a motion to decertify the
class and in August 1999, the Court granted Florida Power's motion. In October
1999, the judge certified the question of whether the case should be tried as a
class action to the Eleventh Circuit Court of Appeals for immediate appellate
review. In December 1999, the Court of Appeals agreed to review the judge's
order decertifying the class.
In December 1998, during mediation in this age discrimination suit, plaintiffs
alleged damages of $100 million. Company management, while not believing
plaintiffs' claim to have merit, offered $5 million in an attempted settlement
of all claims. Plaintiffs rejected that offer. Florida Power and the
plaintiffs engaged in informal settlement discussions, which were terminated on
December 22, 1998. As a result of the plaintiffs' claims, management has
identified a probable range of $5 million to $100 million with no amount within
that range a better estimate of probable loss than any other amount;
accordingly, Florida Power has accrued $5 million. In December 1999, Florida
Power also recorded an accrual of $4.8 million for legal fees associated with
defending its position in these proceedings. There can be no assurance that
this litigation will be settled, or if settled, that the settlement will not
exceed $5 million. Additionally, the ultimate outcome, if litigated, cannot
presently be determined.
Advanced Separation Technologies (AST) -- In 1996, Florida Progress sold its 80%
interest in AST to Calgon Carbon Corporation (Calgon) for net proceeds of $56
million in cash. In January 1998, Calgon filed a lawsuit against Florida
Progress and the other selling shareholder and amended it in April 1998,
alleging misstatement of AST's 1996 revenues, assets and liabilities, seeking
damages and granting Calgon the right to rescind the sale. The lawsuit also
accused the sellers of failing to disclose flaws in AST's manufacturing process
and a lack of quality control. Florida Progress believes that the aggregate
total of all legitimate warranty claims by customers of Advanced Separation
Technologies for which it is probable that Florida Progress will be responsible
under the Stock Purchase Agreement with Calgon is approximately $3.2 million,
and accordingly, accrued $3.2 million in the third quarter of 1999 as an
estimate of probable loss.
Qualifying Facilities Contracts -- Florida Power's purchased power contracts
with qualifying facilities employ separate pricing methodologies for capacity
payments and energy payments. Florida Power has interpreted the pricing
provision in these contracts to allow it to pay an as-available energy price
rather than a higher firm energy price when the avoided unit upon which the
applicable contract is based would not have been operated.
The owners of four qualifying facilities filed suits against Florida Power in
state court over the contract payment terms, and one owner also filed suit in
federal court. Two of the state court suits have been settled, and the federal
case was dismissed, although the plaintiff has appealed. Of the two remaining
state court suits, the trial regarding NCP Lake Power ("Lake") concluded in
December 1998. In April 1999, the judge entered an order granting Lake's breach
of contract claim and ruled that Lake is entitled to receive "firm" energy
payments during on-peak hours, but for all other hours, Lake is entitled to the
"as-available" rate. The Court also ruled that for purposes of calculating
damages, the breach of contract occurred at the inception of the contract. In
August 1999, a Final Judgment was entered for Lake for approximately $4.5
million and Lake filed a Notice of Appeal. In September 1999, Florida Power
filed a notice of cross appeal. Also in this case, in April 1998, Florida Power
filed a petition with the FPSC for a Declaratory Statement that the contract
between the parties limits energy payments thereunder to the avoided costs based
upon an analysis of a hypothetical unit having the characteristics specified in
the contract. In October 1998, the FPSC denied the petition, but Florida Power
appealed to the Florida Supreme Court.
In the other remaining suit regarding Dade County, in May 1999, the parties
reached an agreement in principle to settle their dispute in its entirety,
including all of the ongoing litigation, except the Florida Supreme Court appeal
of an FPSC ruling that is similar to the appeal of the FPSC decision in the Lake
case. The settlement agreement was approved by the Dade County Commission in
December 1999, but is subject to approval by the FPSC.
Management does not expect that the results of these legal actions will have a
material impact on Florida Power's financial position, operations or liquidity.
Florida Power anticipates that all fuel and capacity expenses, including any
settlement amounts incurred as a result of the matters discussed above, will be
recovered from its customers.
Mid-Continent Life Insurance Company (Mid-Continent) -- As discussed below, a
series of events in 1997 significantly jeopardized the ability of Mid-Continent
to implement a plan to eliminate a projected reserve deficiency, resulting in
the impairment of Florida Progress' investment in Mid-Continent. Therefore,
Florida Progress recorded a provision for loss on investment of $86.9 million in
1997. Florida
Progress also recorded an accrual at December 31, 1997, for legal fees
associated with defending its position in current Mid-Continent legal
proceedings.
In the spring of 1997, the Oklahoma State Insurance Commissioner
("Commissioner") received court approval to seize control as receiver of the
operations of Mid-Continent. The Commissioner had alleged that Mid-Continent's
reserves were understated by more than $125 million, thus causing Mid-Continent
to be statutorily impaired. The Commissioner further alleged that Mid-Continent
had violated Oklahoma law relating to deceptive trade practices in connection
with the sale of its "Extra Life" insurance policies and was not entitled to
raise premiums, a key element of Mid-Continent's plan to address the projected
reserve deficiency. While sustaining the receivership, the court also ruled that
premiums could be raised. Although both sides appealed the decision to the
Oklahoma Supreme Court, those appeals were withdrawn in early 1999.
In December 1997, the receiver filed a lawsuit against Florida Progress, certain
of its directors and officers, and certain former Mid-Continent officers, making
a number of allegations and seeking access to Florida Progress' assets to
satisfy policyholder and creditor claims. In April 1998, the court granted
motions to dismiss the individual defendants, leaving Florida Progress as the
sole remaining defendant in the lawsuit.
A new Commissioner was elected in November 1998 and has stated his intention to
work with Florida Progress and others to develop a plan to rehabilitate Mid-
Continent rather than pursue litigation against Florida Progress. Based on data
through December 31, 1998, Florida Progress' actuarial estimate of the
additional assets necessary to fund the reserve, after applying Mid-Continent's
statutory surplus is in the range of $100 million. The amount put forth by the
actuary hired by the former Commissioner was in the range of $350 million.
Florida Progress believes that any estimate of the projected reserve deficiency
would affect only the assets of Mid-Continent, because Florida Progress has
legal defenses to any claims asserted against it. Florida Progress is working
with the new Commissioner to develop a viable plan to rehabilitate Mid-
Continent, which would include the sale of that company. An order agreed upon
by both sides soliciting proposals for a plan of rehabilitation was filed on
March 18, 1999. Proposals from a variety of parties were received and opened in
June 1999.
In October 1999, the new Commissioner signed a Letter of Intent, subject to
approval by the Oklahoma District Court, with Iowa-based Life Investors
Insurance Company of America, a wholly owned subsidiary of AEGON USA, Inc.,
concerning the assumption of all policies of Mid-Continent. In a letter of
intent in connection with the proposed plan of rehabilitation, Florida Progress
agreed to assign all of Mid-Continent's stock to the receiver, and contribute
$10 million to help offset future premium rate increases or coverage reductions,
provided that, among other things, Florida Progress receives a full release from
liability, and the receiver's action against Florida Progress is dismissed, with
prejudice. The $10 million was proposed to be held in escrow by the
Commissioner for a period of 10 years and invested for the benefit of the
policyholders. Any proposed premium increases would have been offset by this
fund until it was exhausted. The Mid-Continent plan was originally scheduled to
be considered by the Oklahoma County District Court in December 1999, but the
Court postponed its consideration and ruled that any party who wishes to submit
an alternative proposal must identify itself to the Commissioner and the Court
no later than December 31, 1999. Four proposers have so identified themselves.
Florida Progress now believes that as part of any plan of rehabilitation, the
Company will be required to contribute the aforementioned $10 million regardless
of which party ultimately assumes the policies of Mid-Continent. Accordingly,
Florida Progress accrued an additional provision for loss of $10 million in
December 1999. The loss was more than offset by the recognition of tax benefits
of approximately $11
million, related to the excess of the tax basis over the current book value of
the investment in Mid-Continent, and thus, did not have a material impact on
Florida Progress' consolidated financial position, operations, or liquidity.
This benefit had not been recorded earlier due to uncertainties associated with
the timing of the tax deduction.
In January 1999, five Mid-Continent policyholders filed a purported class action
against Mid-Continent and the same defendants named in the case filed by the
former Commissioner. The complaint contains substantially the same factual
allegations as those made by the former Commissioner. The suit asserts "Extra
Life" policyholders have been injured as a result of representations made in
connection with the sale of that policy. The suit seeks actual and punitive
damages. The defendants' motions to dismiss were granted in June, and again in
October 1999. A hearing was held in January 2000 on the issue of whether the
dismissal was with or without prejudice. At that hearing, the Court ruled that
the dismissal was without prejudice and granted the policyholders leave to amend
their complaint once again.
Although Florida Progress hopes to complete the negotiated resolution of these
matters involving Mid-Continent, it will continue to vigorously defend itself
against the two lawsuits, if that is required. Although there can be no
assurance as to the outcome of the two lawsuits, Florida Progress believes they
are without merit and that their outcomes would not have a material adverse
effect on Florida Progress' consolidated financial position, results of
operations or liquidity.
Share Exchange Litigation -- In August 1999, Florida Progress announced that it
entered into an Agreement and Plan of Exchange with Carolina Power & Light
Company (CP&L), and CP&L Energy, Inc., a wholly owned subsidiary of CP&L. (See
Note 2 to the Financial Statements.) A lawsuit was filed in September 1999,
against Florida Progress and its directors seeking class action status, an
unspecified amount of damages and injunctive relief, including a declaration
that the agreement and plan of exchange was entered into in breach of the
fiduciary duties of the Florida Progress board of directors, and enjoining
Florida Progress from proceeding with the share exchange. The complaint also
seeks an award of costs and attorney's fees. Florida Progress believes this
suit is without merit, and intends to vigorously defend itself against this
action. Accordingly, no provision for loss has been recorded pertaining to this
matter.
Easement Litigation -- In December 1998, Florida Power was served with this
class action lawsuit seeking damages, declaratory and injunctive relief for the
alleged improper use of electric transmission easements. The plaintiffs contend
that the licensing of fiber optic telecommunications lines to third parties or
telecommunications companies for other than Florida Power's internal use along
the electric transmission line right-of-way exceeds the authority granted in the
easements. In June 1999, plaintiffs amended their complaint to add Progress
Telecommunications Corporation as a defendant and add counts for unjust
enrichment and constructive trust. In January 2000, the court conditionally
certified the class statewide. Management does not expect that the results of
these legal actions will have a material impact on Florida Progress' financial
position, operations or liquidity. Accordingly, no provision for loss has been
recorded pertaining to this matter.
Other Legal Matters -- The Company is involved in various other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect upon the Company's consolidated financial position, results of
operations or liquidity.
Schedule II
FLORIDA PROGRESS CORPORATION
Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 1998, and 1997
(In millions)
Balance at Additions Balance at
Beginning Charged to Other End of
Description of Period Expense Deductions Add (Ded) Period
- ------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
Nuclear Refueling Outage Reserve $ 19.9 $ 1.4 $20.8 $ -- $ 0.5
========== ========== ========== ========== ==========
Provision for loss on coal properties $ 6.6 $ -- $ -- $ (1.3) $ 5.3
========== ========== ========== ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
Nuclear Refueling Outage Reserve $ 22.2 $ -- $ 2.3 $ -- $19.9
========== ========== ========== ========== ==========
Provision for loss on coal properties $ 12.8 $ -- $ -- $ (6.2) $ 6.6
========== ========== ========== ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1997
Nuclear Refueling Outage Reserve $ 8.7 $14.0 $ 0.5 $ -- $22.2
========== ========== ========== ========== ==========
Insurance policy benefit reserves (A) $325.3 $52.7 $ -- $(378.0) $ --
========== ========== ========== ========== ==========
Provision for loss on coal properties $ 40.9 $ -- $ -- $ (28.1) $12.8
========== ========== ========== ========== ==========
(A) Effective December 31, 1997, Florida Progress deconsolidated the financial
statements of Mid-Continent Life in its consolidated financial statements.
Florida Progress' investment from Mid-Continent is accounted for under the cost
method.
Schedule II
FLORIDA POWER CORPORATION
Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 1998, and 1997
(In millions)
Balance at Additions Balance at
Beginning Charged to Deductions End of
Description of Period Expense (See Note) Period
- -----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
1999 Nuclear Refueling Outage Reserve (#11) $19.9 $ 0.6 $20.8 $(0.3)
2001 Nuclear Refueling Outage Reserve (#12) -- 0.8 -- 0.8
---------- ---------- ---------- ---------
$19.9 $ 1.4 $20.8 $ 0.5
========== ========== ========== =========
FOR THE YEAR ENDED DECEMBER 31, 1998
1999 Nuclear Refueling Outage Revenue (#11) $22.2 $ -- $ 2.3 $19.9
---------- ---------- ---------- ---------
$22.2 $ -- $ 2.3 $19.9
========== ========== ========== =========
FOR THE YEAR ENDED DECEMBER 31, 1997
1996 Nuclear Refueling Outage Reserve (#10) $ 0.5 $ -- $ 0.5 $ --
1999 Nuclear Refueling Outage Reserve (#11) 8.2 14.0 -- 22.2
---------- ---------- ---------- ---------
$ 8.7 $14.0 $ 0.5 $22.2
========== ========== ========== =========
Note: Deductions are payments of actual expenditures related to the outage.